Sunny with a chance of wage growth: OECD forecast

The OECD has handed down its latest economic outlook for Australia and it’s mainly good news.

Australia can expect the economy to continue growing at its “robust” pace, around 3 per cent, with business investment and exports set to pick up.

Simultaneously, a stronger labour market together with rising household incomes will support consumption, while inflation and wages are also likely to increase gradually.

“Rising employment is boosting incomes and consumption. Employment has risen quickly, with many jobs filled by rising participation in the labour market, in particular among women and older workers,” the OECD said.

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“Rising participation has slowed further declines in unemployment and kept inflation pressures in check. Wage increases are picking up only gradually.”

However, the combination of stronger employment growth and labour market participation also triggers “uncertainty” around the amount of slack in the economy and when the economic growth will actually manifest in stronger wage and income growth.

With this in mind, the OECD predicts wage growth will pick up around the end of the year. This could likely trigger a cash rate rise, the OECD added.

“The resulting boost to household incomes should mitigate risks associated with Australia’s very high household indebtedness,” it said.

We're not home and hosed

However, the OECD warned Australia against complacency when it comes to housing indebtedness.

“Risks from the housing market and high household indebtedness warrant continued vigilance,” the OECD said.

It noted that the housing market has already shown symptoms of easing with price growth slowing “markedly”, thanks in part to the Australian Prudential Regulation Authority’s measures to tighten investor lending.

Households in mining regions are a “concern” to the OECD but the rest are considered sound.

“Risks from leveraged households and the housing market remain elevated, and the central bank and supervisors should therefore maintain vigilance,” it said.

“Unexpectedly large corrections in house prices would reduce household wealth, and could cut consumption and damage the construction sector.”